M/s Hero Cycles Ltd., Ludhiana V. ACIT, Ludhiana

ITA 192/CHANDI/2013

• Counselvise Citation: 19221514 RSA 2013
• Duration Of Justice: 2 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 18-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.192/CHD/2013 ( ASSESSMENT YEAR : 2008-09) M/S HERO CYCLES LTD., VS. THE A.C.I.T., G.T. ROAD, HERO NAGAR, CIRCLE-V, LUDHIANA. LUDHIANA. PAN: AAACH4073P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBHASH AGGARWAL RESPONDENT BY : SHRI S.K. MITTAL, DR DATE OF HEARING : 28.09.2015 DATE OF PRONOUNCEMENT : 29.10.2015 O R D E R PER RANO JAIN, A.M . : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA DATED 28.12.2012. 2. THERE ARE ELEVEN GROUNDS OF APPEAL RAISED BY TH E ASSESSEE. GROUND NOS.1 TO 8 RELATE TO THE DISALLO WANCE OF RS.4,17,28,341/- MADE BY THE ASSESSING OFFICER UNDE R SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) 2 3. BRIEFLY, THE FACTS OF THE CASE ARE THAT DURING THE YEAR, THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.38,88,83,362/- AND LONG TERM CAPITAL GAIN OF RS.14,64,10,504/-, WHICH WERE CLAIMED AS EXEMPT. THE ASSESSEE HAD INVESTMENT OF RS.3,84,34,37,861/- AND RS.4,64,39,13,422/- AS ON 31.7.2007 AND 31.3.2008 RESPECTIVELY AND HAD INCURRED INTEREST EXPENDITURE OF RS.13,07,63,450/-. AFTER CONSIDERING THE DETAILED SUBMISSIONS MADE BY THE ASSESSEE, THE ASSESSING OFF ICER HELD THAT THE PROVISIONS OF SECTION 14A OF THE ACT WERE APPLICABLE IN ASSESSEES CASE. THEREAFTER, HE COM PUTED THE DISALLOWANCE UNDER RULE 8D OF THE INCOME TAX RU LES, WHICH WORKED OUT AT RS.6,90,42,168/-. SINCE THE ASS ESSEE HAD ALREADY DISALLOWED AN AMOUNT OF RS.2,73,13,827/ -, THE REMAINING AMOUNT OF RS.4,17,28,341/- WAS DISALL OWED BY THE ASSESSING OFFICER. 4. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE SUBMITTED THAT ALL THE EXPENDITURE INCURRED IN RELA TION TO INVESTMENT HAVE BEEN SUO MOTO DISALLOWED BY THE ASS ESSEE BEING RS.2,73,13,827/-. FURTHER, IT WAS ARGUED TH AT THE ASSESSING OFFICER HAS WRONGLY CONSIDERED THE INVEST MENT, THE INCOME FROM WHICH ARE TAXABLE FOR CALCULATING T HE AVERAGE VALUE OF INVESTMENT FOR RULE 8D OF THE INCO ME TAX RULES. IT WAS ALSO SUBMITTED THAT THE ASSESSING O FFICER HAS WRONGLY TREATED THE GROSS INTEREST OF ALL UNITS AT RS.13,07,63,450/- IRRESPECTIVE OF THE PURPOSES FOR WHICH THE LOAN WAS OBTAINED INSTEAD OF CONSIDERING GROSS 3 INTEREST PAID BY MAIN UNIT AT RS.6,59,91,716/- WHER E THE INVESTMENTS ARE HELD AS EXPLAINED DURING THE ASSESS MENT PROCEEDINGS. FURTHER, IT WAS ALSO SUBMITTED THAT THE ASSESSING OFFICER HAS NOT CONSIDERED AND REDUCED TH E INTEREST RECEIVED AT RS.5,04,04,640/- AND SHOWN SEPARATELY IN THE PROFIT & LOSS ACCOUNT WHILE DISAL LOWING THE INTEREST FOR THE PURPOSES OF SECTION 14A OF THE ACT. FURTHER, THE ASSESSING OFFICER FAILED TO DEDUCE THE INTEREST EXPENSES WHICH HAVE BEEN CAPITALIZED BY HI M APPLYING THE EXPLANATION-8 TO SECTION 43(1) OF THE ACT AT RS.20,24,929/-. ON THE BASIS OF THESE SUBMISSIONS , IT WAS PRAYED TO DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. HOWEVER, THE LEARNED CIT (APPE ALS) FOUND HIMSELF NOT IN AGREEMENT WITH THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT THE PROVISIONS OF SECTIO N 14A OF THE ACT ARE CLEARLY APPLICABLE TO THE ASSESSEE A ND THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN DISALLOWIN G AN AMOUNT OF RS.4,17,28,341/- UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES. 5. AGGRIEVED BY THE SAID ORDER OF THE LEARNED CIT (APPEALS), THE ASSESSEE HAS COME UP IN APPEAL BEFOR E US. 6. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT (APPEALS). THE MAIN ARGUME NTS OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT FOR T HE PURPOSES OF COMPUTING THE DISALLOWANCE UNDER SECTIO N 14A OF THE ACT, THE ASSESSING OFFICER HAS TAKEN TOTAL I NTEREST 4 PAID BY ALL UNITS AT RS.13,07,63,450/- WHILE THE INVESTMENT HAD BEEN MADE ONLY BY THE MAIN UNIT WHER E THE INTEREST PAID WAS RS.6,59,91,716/-. FOR THIS, RELIANCE WAS PLACED ON THE ORDER OF THE PUNJAB & HA RYANA HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YE AR 2004-05, REPORTED IN 323 ITR 518, WHEREBY IT WAS HE LD THAT ONLY MAIN UNIT HAS MADE INVESTMENTS AND AS FAR AS OTHER UNITS ARE CONCERNED, NONE OF THEIR FUNDS HAS BEEN UTILIZED TO MAKE THE INVESTMENTS. THEREFORE, FOR T HE PURPOSE OF COMPUTING THE DISALLOWANCE UNDER RULE 8D OF THE INCOME TAX RULES, ONLY INVESTMENT PERTAINING TO MAIN UNIT SHOULD BE TAKEN. THE OTHER ARGUMENTS OF THE L EARNED COUNSEL FOR THE ASSESSEE WAS THAT APART FROM MAKING INTEREST EXPENDITURE, THE ASSESSEE HAS ALSO RECEIVE D AN AMOUNT OF RS.5,04,04,640/-AS THE INTEREST RECEIPT. THIS AMOUNT HAS TO BE DEDUCTED FROM THE FIGURE OF INTERE ST PAID. FOR THIS PURPOSE, RELIANCE WAS PLACED ON THE ORDER OF THE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2007-08 IN ITA NO.1297/CHD/2010 DATED 19.10.2011, WHEREBY IT WAS H ELD THAT THE INTEREST RECEIVED ARE TO BE SET OFF AGAINS T THE INTEREST PAID FOR MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. FURTHER, IT WAS ARGUED THAT THE ASSES SING OFFICER HAS CAPITALIZED INTEREST AMOUNTING TO RS.20,24,929/- ON AN INVESTMENT OF RS.7,29,70,438/- IN PAINT SHOP, WHICH WAS COMMISSIONED IN JANUARY, 2008 . THIS INTEREST SHOULD ALSO BE REDUCED FROM THE AMOU NT OF TOTAL INTEREST. APART FROM THESE ARGUMENTS, EMPHAS IS WAS 5 GIVEN TO THE FACT THAT THE TOTAL INVESTMENTS IN SHA RES AND MUTUAL FUNDS AS ON 31.3.2007 WAS RS.3,84,34,37,861/ - WHICH IN THE ASSESSMENT YEAR 2007-08 HAS BEEN HELD TO BE OUT OF OWN FUNDS. THE INVESTMENT AS ON 31.3.2008 WAS RS.4,64,39,13,422/-. THUS, THERE WAS AN INCREASE OF RS.80,04,75,561/- DURING THE YEAR. THIS WAS OUT O F ASSESSEES OWN FUNDS, RESERVES AND INCOME OF THE YE AR. OUR ATTENTION WAS INVITED TO PAGE NOS. 42 AND 45 OF THE PAPER BOOK FILED BY THE ASSESSEE TO SHOW THAT THE R ESERVES AND OWN FUNDS OF THE ASSESSEE COMPANY AS ON 31.3.20 08 ARE RS.6,24,18,74,854/-. IN THIS WAY, IT WAS PRAY ED THAT NO DISALLOWANCE OF INTEREST UNDER SECTION 14A OF TH E ACT CAN BE MADE AND AS REGARDS ADMINISTRATIVE EXPENSES, IT WAS SUBMITTED THAT THE ASSESSEE HAVING SUO MOTO DISALLOWED AN AMOUNT OF RS.2,73,13,827/-, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT BE SUSTAI NED. 7. THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER AS WELL AS OF THE LEARNED CIT (AP PEALS). HE ALSO RELIED UPON THE ORDER OF THE SPECIAL BENCH OF I.T.A.T., DELHI IN THE CASE OF CHEMINVEST LIMITED VS. CIT, 121 ITD 318 TO THE EFFECT THAT THE DISALLOWANCE UND ER SECTION 14A OF THE ACT CAN ALSO BE MADE IN A YEAR I N WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. HE RELIED UPON ANOTHER ORDER OF THE CHANDIGARH BENCH OF THE I.T.A.T. IN THE CASE OF CH ADHA SUPER CARS P. LTD. IN ITA NO.1241/CHD/2011, DATED 28.12.2012 TO THE EFFECT THAT EVEN IN THE ABSENCE O F 6 SPECIFIC UTILIZATION OF FUNDS, RULE 8D OF THE INCOM E TAX RULES WILL BE APPLICABLE. 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. FROM THE PERUSAL OF THE BALANCE SHEET AND OTHER DOCUMENTS FILED IN THE PAPER BOOK, WE SEE THAT THE TOTAL INVESTMENT IN SHARES AND MUTUAL FUNDS AS ON 31.3.20 07 WAS OF RS.3,83,82,47,226/- WHILE THE INVESTMENT AS ON 31.3.2008 IS OF RS.4,64,37,73,922. THEREFORE, THE RE WAS AN INCREASE OF AROUND RS.80 CRORES IN THE INVESTMEN T DURING THE YEAR. WHILE RESERVES AND OWN FUNDS OF THE ASSESSEE COMPANY AS ON 31.3.2008 ARE AMOUNTING TO RS.6,24,18,74,854/-. FROM THESE FIGURES, IT IS QU ITE CLEAR THAT OWN FUNDS AND RESERVES OF THE ASSESSEE ARE MOR E THAN SUFFICIENT TO COVER THE INVESTMENT MADE DURING THE YEAR. IN SUCH A SCENARIO, IT CAN BE VERY CONVENIENTLY PRE SUMED THAT ALL THE INVESTMENT HAVE BEEN MADE OUT OF OWN F UNDS. FOR THIS PURPOSE, RELIANCE IS PLACED ON THE JUDGMEN T OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF B RIGHT ENTERPRISES PVT. LTD. VS. CIT IN ITA NO.624 OF 2013 (O&M) DATED 24.7.2015, WHEREBY IT HAS BEEN HELD AS UNDER : 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APP ELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS.10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AGREEMENT WITH T HE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES & POWER LTD., (2009) 313 ITR 340, PARA-10, THAT IF TH ERE ARE INTEREST FREE FUNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE 7 INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. 9. THEREFORE, IN SUCH CIRCUMSTANCES, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT ON ACCOUN T OF INTEREST CAN BE MADE. THOUGH THE LEARNED COUNSEL F OR THE ASSESSEE HAS MADE ALTERNATIVE SUBMISSIONS ON THE COMPUTATION MADE BY THE ASSESSING OFFICER UNDER RUL E 8D OF THE INCOME TAX RULES, IN VIEW OF OUR FINDING THA T NO DISALLOWANCE ON ACCOUNT OF INTEREST UNDER SECTION 1 4A AN BE MADE, WE DO NOT FIND ANY NEED TO ADJUDICATE THES E ISSUES. 10. AS REGARDS ADMINISTRATIVE EXPENSES, IT IS A FA CT ON RECORD THAT THE ASSESSEE HIMSELF HAD DISALLOWED AN AMOUNT OF RS.2,73,13,827/- ON ACCOUNT OF EXPENSES INCURRED FOR EARNING TAX FREE INCOME AND THE ASSESS ING OFFICER HAS NOWHERE RECORDED A FINDING AS TO WHY TH E DISALLOWANCE SO MADE BY THE ASSESSEE IS NOT CORRECT . RELIANCE IS PLACED ON THE JUDGMENT OF THE HON'BLE JURISDICTIONAL PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT VS. DEEPAK MITTAL (2014) 361 ITR 131 TO THE EFF ECT THAT IN THE ABSENCE OF ANY SATISFACTION RECORDED BY THE ASSESSING OFFICER AS TO WHY THE CALCULATION MADE BY THE ASSESSEE IS NOT CORRECT, THE DISALLOWANCE MADE BY H IM ON ACCOUNT OF ADMINISTRATIVE EXPENSES UNDER RULE 8D OF THE INCOME TAX RULES IS NOT AS PER LAW. IN VIEW OF TH E ABOVE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SE CTION 8 14 OF THE ACT READ RULE 8D OF THE INCOME TAX RULES IS DELETED. 11. THE GROUND NO.9 RAISED BY THE ASSESSEE RELATES TO THE CAPITALIZATION OF INTEREST AMOUNTING TO RS.20,24,929/- 12. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE INSTALLED A NEW PAINT SHOP AT A COST OF RS.7,29,70, 438/- DURING THE YEAR. AFTER CONSIDERING THE ASSESSEES SUBMISSION, REFERRING TO EXPLANATION-8 TO SECTION 4 3(1) OF THE ACT, THE ASSESSING OFFICER FORMED A VIEW THAT T HE AMOUNT OF INTEREST PERTAINING TO INVESTMENT IN PAIN T SHOP WAS LIABLE TO BE CAPITALIZED AS PER SECTION 36(1)(I II) AND EXPLANATION-8 TO SECTION 43(1) OF THE ACT. HE NO TED THAT THE ASSESSEE RECEIVED THE PAINT SHOP AS ON 31.10.20 07 WHICH WAS INSTALLED IN THE MONTH OF JANUARY, 2008. HE ACCORDINGLY, COMPUTED THE INTEREST ON INVESTMENT OF RS.7,29,70,438/- FOR THREE MONTHS @ 12% PER MONTH, WHICH WORKED OUT TO RS.21,80,113/-. AFTER ALLOWIN G DEPRECIATION @ 7.5% A DISALLOWANCE OF RS.20,24,929/ - WAS MADE. 13. BEFORE THE LEARNED CIT (APPEALS), TWO FOLD SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE, FI RSTLY IT WAS SUBMITTED THAT NO INTEREST BEARING FUNDS WERE U SED FOR ACQUISITION OF PAINT SHOP AND SECONDLY, THE PAI NT SHOP WAS JUST A REPLACEMENT AND NOT AN EXTENSION OF THE BUSINESS OF THE ASSESSEE. HOWEVER, THE LEARNED CI T 9 (APPEALS) REJECTED BOTH THE CONTENTIONS OF THE ASSE SSEE AND DISMISSED THIS GROUND OF APPEAL. 14. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES, WHILE THE LEARNED D.R. RELIED UPON ON THE ORDER OF THE LOWER AUTHORITIES. 15. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. THE UNDISPUTED FACTS OF THE CASE ARE THAT A PAINT S HOP WAS ACQUIRED BY THE ASSESSEE AT A COST OF RS.7.29 CRORE S DURING THE YEAR, WHICH WAS IMPORTED FROM GERMANY ON 31.10.2007 AND COMMISSIONED IN JANUARY, 2008. 16. THE DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROPORTIONATE INTER EST FOR THREE MONTHS, ON THE PREMISES THAT INTEREST BEARING FUNDS ARE USED FOR THE PURPOSES OF ACQUISITION OF THE PAI NT SHOP. THE REPLY FILED BY THE ASSESSEE WAS THAT THE FUNDS HAVE BEEN USED FROM THE C/C ACCOUNT WITH ICICI BANK, WHI CH IS ALLOWED BY THE BANK FOR THE PURPOSES OF BUSINESS ON LY. THE C/C ACCOUNT IS AN INTEREST BEARING FUND. THERE FORE, DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ACCOUNT IS CORRECT. AS REGARDS THE CONTENTION OF T HE ASSESSEE THAT THERE IS NO EXTENSION OF THE EXISTING BUSINESS, WE DO NOT FIND ANY INFIRMITY IN THE OBSER VATION MADE BY THE CIT (APPEALS). IT IS CLEAR FROM THE RE CORD THAT 10 A NEW ASSET HAS BEEN PURCHASED IN THE FORM OF PAINT SHOP WHICH WAS IMPORTED FROM GERMANY. THIS SHOP CLEARL Y ADDS TO THE BUSINESS OF THE ASSESSEE. NO EVIDENCE IS THERE ON RECORD THAT THIS IS IN REPLACEMENT OF AN EXISTING ASSETS. AS REGARDS THE ALTERNATIVE CONTENTION OF A LLOWING DEPRECIATION ON SUCH CAPITALIZATION, WE SEE THAT TH E DISALLOWANCE ITSELF HAS BEEN MADE AFTER PROVIDING DEPRECIATION. THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISMISSED. 17. GROUND NOS.10 AND 11 ARE CONSEQUENTIAL IN NATURE. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF OCTOBER, 2015. SD/- SD/- (H.L.KARWA) (RANO JAIN) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 29 TH OCTOBER, 2015 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE D R. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 11